On Thursday the Wall Street Journal ran a major story discussing how the Hollywood studios are trying to cut back on the huge payouts to movie stars. David Poland of the Hot Blog and Movie City News did a follow-up which linked to articles by Gabriel Snyder at Gawker and Kim Masters of The Daily Beast.
Anyone interested in movies, especially the business of movies, should read all four articles. The gist of it is that Hollywood is trying to crackdown on costs and improve the risk-reward tradeoff on movie production. The weak economy, loss of hedge fund financing for movie slates, decline in DVD revenue, and uncertainty over revenue streams from various digital technologies is driving the studios to try to increase margins. The first step has been to cut back on the number of productions and focus on larger films with higher box office and profit potential including international success. For example, Disney is down to 13 films this year from about 20 a few years ago.
A second step was trying to return the independent film business to its roots. Over the last few years, the major studios invaded the indie business which led to a lot more indie films with sizable production and marketing budgets. These indie studios have now been mostly folded into their parents.
Traditional cost cutting is also at work with layoffs and other cutbacks.
With the box office coming off two good years and off to a great start this year, I think this WSJ article helps to improve sentiment towards the studio owners which include Time Warner, Disney, News Corporation, and Viacom.
Key points from the WSJ and follow-up articles are that studios are trying to move major stars from points off the top of studio box office take (a bit over 50% of global box office – the theaters get the rest) to a percent or flat rate after the studio recoups marketing and production costs. The details in the Gawker column about how actors are paid are a must read for investors interested in movie studio stocks.
The bottom line is that box office gets the ink (including a lot of my own) but what really matters is studio level profitability on their annual slate of films. This is especially important for Viacom and Time Warner where the studios are a much higher percentage of revenue and cash flow.
Part of the reason I am long the new Time Warner is that Warner Brothers is a traditionally successful studio and has taken a lot of strides toward the Disney and News Corporation model, which has produced industry leading margins and profits the last five years. On the other hand, Viacom’s Paramount studio has been in a multi-year slump for films where it owns the intellectual property and has a ways to go to rebuild the profit engine.